Broadening their range of sustainable equity strategies, NN Investment Partners (NN IP) and Irish Life Investment Managers (ILIM) have introduced three new enhanced index funds, offering investors a way to invest responsibly while closely tracking an established stock index.
One of the three new Luxembourg-registered funds invests in global developed markets while the other two funds focus on North America and Europe, meeting the needs of clients who want to allocate to these regions within their asset allocation.
Earlier this year, NN IP and ILIM announced their partnership to jointly manage a range of sustainable enhanced equity index strategies, launching the NN (L) Emerging Markets Enhanced Index Sustainable Equity fund in March. The new strategies combine NN IP’s expertise in sustainability with ILIM’s experience in index tracking – NN IP determines the stock selection and monitors the funds’ sustainability characteristics, while ILIM executes day-to-day portfolio management.
Passive investment products that track indices have proliferated in the past decade, but there are few options available for investors who want to invest responsibly. By incorporating exclusions as well as a positive selection approach, these sustainable enhanced index solutions blend the low tracking error of passive funds with a much stronger sustainability profile.
This approach enables investors to incorporate environmental, social and governance (ESG) factors into their equity portfolios at a modest cost while targeting risk-adjusted returns comparable to those of the traditional benchmark.
“Traditional passive funds that simply replicate a benchmark do not incorporate any selection criteria based on sustainability and have no scope to reward sustainable companies,” says Jeroen Bos, head of specialized equity and responsible investing at NN IP. “The active decisions that we integrate into our sustainable enhanced solutions means that investors can incorporate these elements effectively in their portfolios.”
Shane Cahill, head of Indexation Business at ILIM, says, “Irish Life has been adopting responsible investment practices across our business for many years. Expanding our indexed solution to provide additional options for clients which incorporate responsible investment principles is a key priority and our partnership with NN IP supports that ambition. We continue to build on our capability in Irish Life Investment Managers around ESG and how we integrate across many strategies.”
ILIM manages the risk exposure of the fund after targeting sustainable companies to ensure that the portfolio does not contain any unintended risks. This means that performance will be broadly in line with market returns.
In implementing its enhanced investment process, NN IP makes positive selections based on criteria such as carbon emissions, governance and other ESG-related aspects, while removing index constituent stocks that are not in keeping with its sustainability model. ILIM’s extensive experience in daily index tracking helps keep the tracking error as low as possible, even within the stringent screening criteria.
With the launch of the three new funds, NN IP has almost 4 billion euros (US$4.47 billion) under management in its Enhanced Index Sustainable Equity range. ILIM has undergone significant growth in recent years in its indexation business, with assets under management now exceeding 50 billion euros.